Dun & Bradstreet downgrades Kuwait's monthly country risk rating from DB2a to DB2b

The DB country risk indicator is released monthly and provides a comparative, cross-border assessment of the risk of doing business in a country. The DB risk indicator is a composite index of four risk categories: political risk, commercial risk, external risk and macroeconomic risk. The DB risk indicator is divided into seven bands, ranging from DB1 through DB7. Each band is subdivided into quartiles (a-d) with an 'a' representing slightly lesser risk than a 'b' designation and so on.

Confidence in Kuwait's banking sector experienced a significant blow in late October when the country's second largest lender, Gulf Bank, announced that it had amassed a loss of USD 750m resulting from bad derivatives investments in the US. The announcement led to the immediate resignation of the bank's chairman, and a run on deposits held by the bank.

While this signalled bad news for the Kuwaiti banking industry, the quick and decisive response of the government should be commended. The Kuwaiti parliament approved emergency legislation guaranteeing deposits held by both domestic and foreign banks in the country; following the example of Saudi Arabia and the UAE. Also, in an effort to ensure the availability of domestic liquidity, the Central Bank of Kuwait followed the measures taken by the US Federal Reserve and cut interest rates by a cumulative 150bps in the month of October. At a broader level, the effort sent a signal to the markets and consumers that action is being taken to avoid the worst of the global financial crisis.

This cut in interest rates is likely to aggravate inflationary pressures further, yet the latest cuts are no cause for excessive concern as changes in interest rates usually take some months before they begin to feed through inflation. This is particularly relevant as inflation has been fuelled by high international food prices and these costs are expected to decline in the future. Also, as world oil prices have tumbled as of late, the source of Kuwait's liquidity, and thus inflation, will be curtailed. However, while inflation looks to ease, real GDP growth will slow in 2009. D&B has revised its figures for GDP growth by nearly half; from 5.7% to 2.8% in 2008, which means that an improvement in Kuwait's country risk rating will be harder to achieve.

In spite of this, Kuwait can launch a medium-term recovery from a relatively strong base, driven by the high oil prices seen over recent years. While, due to a decline in world oil prices, government revenues will be lower in the future, the first half of this fiscal year saw oil revenues reach $54bn, which is far beyond the official projection for the whole fiscal year of $47.5bn. Such resources should allow the government to keep its promise of not cutting development spending.